Truck Law

A Transportation Law Blog from TransportationAttorneys.NET

Month: April, 2017

The 20 Factor IRS Test for Independent Contractors

by G. Spencer Mynko, Esq.

Because tomorrow is Tax Day, I was inspired to review the IRS Factors used to determine if a worker is an Independent Contractor or Employee.  The IRS test is not as restrictive as California state agencies and courts. If you find yourself being audited by IRS and they are targeting you for misclassification of drivers, keep these factors in mind.

California is a hostile place for trucking companies that choose to classify drivers as Independent Contractors. Anyone who does work for compensation in California is presumed to be an employee.  Therefore, the burden of proof falls upon the Trucking Company to prove that their drivers are Independent Contractors. While my practice focuses primarily on State agencies such as EDD, Labor Board, Workers Compensation Appeals Board and Civil lawsuits alleging misclassification, it is important to remember how the IRS determines whether someone is an employee or independent contractor. This is especially true because of the cooperative relationship and understanding that EDD has with the IRS: If EDD determines that you are misclassifying drivers, they will share their findings with the IRS and vice versa. Therefore, I think its worth talking about what the IRS looks for in determining whether a worker is an Employee or Independent Contractor.  The IRS employs a 20 factor test to determine independent contractor status under the Internal Revenue Code. These factors generally relate to  evidence of behavioral and financial control and  the nature of the worker’s relationship with the employer.

The twenty factors are: 

1. Whether the worker is required to follow the company’s instructions. 
2. Whether the company provides training to the worker to accomplish the work. 
3. Whether the worker’s services are integrated into the company’s regular business. 
4. Whether the company requires that the worker perform the services personally, as opposed to assigning work to others. 
5. Whether the company hires, supervises and pays the worker’s assistants. 
6. Whether there is a continuing relationship between the company and the worker. 
7. Whether the company sets the worker’s hours.   
8. Whether the company requires the worker to work full-time.   
9. Whether the worker works at the employer’s place of business.   
10. Whether the company sets the order or sequence of the worker’s work.   
11. Whether the worker is required to provide oral or written status reports to the company.   
12. Whether the worker is paid by the hour, week or month, rather than upon completion of the project.   
13. Whether the worker is reimbursed for business or travel expenses. 
14. Whether the company provides the employer with tools and materials.   
15. Whether the worker has made a significant investment in performing the services.   
16. Whether the worker can realize a profit or loss.   
17. Whether the worker works for more than one company at a time.   
18. Whether the worker makes the services available to the general public.   
19. Whether the company has the unilateral right to discharge the worker. 
20. Whether the worker has the right to terminate the relationship without being liable under contract.
Call Transportation Attorneys so we can tell you what side of the Independent Contractor/Employee fence you will fall on if you get audited by the IRS!
We hope that once you utilize Transportation Attorneys to help you get your IC agreements and business model set up, you’ll enjoy many miles of trouble-free trucking.  If you find yourself in trouble, you can turn to to fight for you. We are one of the few law firms that focuses on trucking, transportation and logistics with the knowledge and experience to competently guide you through these ever present hazards.  We are very experienced in dealing with the distinctions between independent contractors and employees.

EDD Audits and Driver Misclassification

by G. Spencer Mynko, Esq.

Transportation attorneys recently handled several EDD audits of trucking companies. As with every EDD audit of a trucking company, EDD it’s going to be particularly interested in whether the drivers were properly classified as independent contractors. In this article, I will focus on my experience with EDD audits, what triggered your audit, and what auditors look for in determining whether drivers were properly classified as independent contractors. 

Why is your trucking company being audited by EDD?
EDD audits trucking companies for several reasons. Common reasons include a driver filing a claim for unemployment or disability benefits with no corresponding contributions from the trucking company to California’s Unemployment Insurance fund.

Another reason is because a particular company issues a large number of 1099s. And it’s usually just more than simply issuing a substantial number 1099’s: The EDD will look to see if the independent contractor who received the 1099 has likewise contributed to unemployment insurance. When they see that they haven’t, the likelihood of the trucking company getting audited increases. Here is something I recently learned from speaking directly with an EDD auditor: Once EDD sees that your company is issuing a substantial number of 1099’s, EDD will look a step further to see if the contractors who are receiving the 1099’s have paid into unemployment insurance. Because independent contractor drivers almost never pay unemployment insurance, they never show up on EDD’s roster, and the chance of an audit increases. This has been the most common reason EDD auditors informed me at audits as to why my client is being audited.

Other governmental agencies may also tip off the EDD. The IRS or Department of Labor regularly advise their counterparts at the EDD when they have discovered a company is misclassifying drivers. They basically handover their evidence to the EDD and the EDD audits the company.

Of course, trucking companies get audited randomly. Considering the fact that trucking companies have a terrible reputation for misclassifying drivers, EDD specifically will target trucking companies for random audits.

So what do auditors look for and what are they interested in?
First and foremost:  do the drivers on their own trucks. I have always stated that if the driver owns his own truck, and the truck is registered in the independent contractor’s name, this will get the Company 90 yards down the field toward being successful in their argument that the drivers are properly classified as independent contractors. One of the tests of whether someone is an independent contractor is whether they have made a substantial investment into their business: because a truck clearly qualifies as a “substantial investment”, owning a truck and have it having it registered in the driver’s name goes along way toward establishing that they are independent contractors. However, and many trucking companies may find this frightening, simply because the drivers on their own trucks does not guarantee the EDD auditor will agree that they are independent contractors. I have actually had EDD auditors decide that the drivers were independent contractors despite the fact that they owned their own trucks.

Who pays for fuel, insurance, and maintenance: EDD auditors will almost universally be interested in who is responsible for paying for fuel, insurance, and maintenance. More often than not, independent contractors will purchase fuel and insurance through the company. The critical issue though, is whether the drivers are free to pay for their own insurance and get fuel wherever they choose. As long as the driver is not forced to purchase fuel, maintenance, and insurance through the trucking company, the scale will tilt toward independence.

EDD auditors will ask whether the drivers drive for other companies. Obviously, if you work with independent contractors who actually drive for other companies, you want to EDD auditor to be aware of that. If they don’t drive for other companies, then you need to make it clear to the auditor that they have the freedom to drive for any company they choose to, but simply choose to only drive for your company. Again this is a huge issue.

EDD auditors Will always ask whether drivers are free to accept or reject loads. If the driver accepts 100% of the loads they are offered, the EDD auditor maybe skeptical of their true independence. That is why it is so important to convince the auditor that the drivers are truly free to accept or reject loads as they please. Furthermore, there can be no reprisal for rejecting a load. It also needs to be made clear to the auditor that there are no guaranteed number of loads, and just because the driver gets a load this week, doesn’t mean he will get another load next week or for that matter, ever again.

Operating authority: EDD auditors always ask whether drivers have their own operating authority. While it is common industry practice for independent contractor drivers to drive under the companies’ authority, and I think it’s proper to do so, they still ask whether they have their own authority. This is why I always advise clients to work with drivers who do have their own authority, even if it is simply a CA number. Obviously, it’s nice if they have their own MC or DOT number, but some authority is better than no authority. 

Contracts: EDD auditors always ask whether the independent contractor driver has a written contract establishing that the driver is in an independent contractor relationship with the company. While having a contract in place stating that “I am an independent contractor” is necessary in my opinion, it is not sufficient, nor will it guarantee, that a driver is an independent contractor. Auditors will always look beyond the contract and scrutinize the actual conduct of the parties.

Instructions and training. Remember, an independent contractor decides how to do the job and will establish his or hour and procedures, and act without supervision. So as far as a trucking company is concerned, the trucking company should only be concerned that the driver gets the freight from point A to point B The “how” that happens is entirely up to the driver. A company should never admit to providing the driver with “training” . Again, the driver uses his own methods and receives no training from the trucking company. Nor should the driver be required to attend meetings

Does the driver have any proof or indicators that he or she is truly in business for him or herself. Things like business licenses, incorporation, business cards, website, etc. are all important indicators that the driver is genuinely in business for himself. This is another reason I encourage companies to work with drivers who are incorporated. I’ve had EDD auditors clear drivers if they are incorporated and the 1099 that the company issues is attached to an EIN number as opposed to a Social Security number. Remember, an independent contractor is supposed to be in business for him or herself, and hold him or herself out to the general public as a professional driver who is free to drive for any company he or she chooses.

Membership in Owner Operators Independent Drivers Association.  Membership in 00IDA helps make a driver look as if he’s truly independent.

Occupational accident Insurance: I have always felt it is a great idea to work with contractors who carry their own occupational accident Insurance .  First of all, it makes them look independent if they purchase insurance to protect themselves against injury. Secondly, it protects the company if, God forbid, something horrible happened.

What are EDD auditors skeptical of?

Lease agreements. If The trucking company claims that the driver is leasing the truck from the company, that is going to raise a whole a lot of questions. While it is possible for a truly independent contractor driver to lease a truck from the company he drives for, it is going to be very, very challenging to convince the EDD auditor that this is a true lease and not simply some scheme used to avoid classifying the driver as an employee. Be very very careful about lease agreements. Indeed, I would speak with a transportation attorney about whether your lease agreement will pass scrutiny.
Misclassification of truck drivers as Independent Contractors continues to be a Hot Button issue. I am amazed at how many phone calls I get from trucking companies who are flirting with disaster by not properly classifying drivers. 
Contact today to discuss your Independent Contractor business model.